The Use of Trusts in Estate Planning
By Ralph M. Engel
An overview of the types of trusts typically utilized by individuals with moderate to substantial wealth.
Except with respect to “I love you” all-to-spouse or all-to-children wills, almost all modern estate plans incorporate one or more trusts.
Some types of trusts are utilized in an attempt to postpone or even eliminate estate taxes. Others may be utilized to deal with particular problems, such as an incapacitated beneficiary or a second (or third) marriage. Still others are created to deal with multigenerational planning, or to protect a beneficiary against creditors, future spouses, or even the beneficiary’s existing spouse.
In certain instances, trusts are utilized to avoid state income taxes, such as those with appropriate trustees and asset locations that are run from states that have no income or capital gains taxes on trusts for the benefit of nonresidents. In others, trusts are used to obtain estate and/or gift tax discounts, avoid or postpone capital gains taxes, deal with assets passing to spouses who are not U.S. citizens, aid charities, etc.
There are also a few entities called trusts that do not fit into the typical trust image, such as mortgage arrangements that, in some states, are denominated as trusts, and certain business ventures called trusts.
Over the years some trusts have acquired multiple names. In fact, we ascertained that the 50 or so trusts (or arrangements denominated as trusts) that are discussed here are known by an aggregate of 75 different names.
This discussion is not meant to be detailed coverage of every type of trust in existence. Its purpose is to provide an overview of the types of trusts typically utilized by taxpayers of moderate to substantial wealth.
The following is a listing of the types of trusts that may be encountered in connection with estate planning.